By John Drachman
What if the value of the dollars you earned suddenly exceeded the worth of the goods and services they purchased? Something similar might be happening right now to cryptocurrencies like Bitcoin.
“Bitcoin transactions and tradability are still limited,” Deutsche Bank analyst Marion Laboure said recently. “And the real debate is whether rising valuations alone can be reason enough for Bitcoin to evolve into an asset class, or whether its illiquidity is an obstacle.” Whether the widely held digital currency will be broadly employed in commerce or ultimately used for speculating on price appreciation is still unknown.
Representing a store of value associated with the growth of our digital economy, Bitcoin is durable, scarce and portable. Despite the fact its market cap reached $1 trillion, making it the third largest currency in the world, Bitcoin’s volatility could restrain its use down the road as a fickle marketplace magnifies the ups and downs of digital assets.
“The hypothesis is that Bitcoin will become an important means of payment in the future,” Laboure continued. Despite the fact that MasterCard and PayPal have added Bitcoin to their payment systems, actual commercial transactions are still limited, as individual investors followed the lead of major Wall Street firms in holding Bitcoin for its long-term price appreciation prospects.
Something called the “Tinkerbell effect” may also limit Bitcoin’s value as an asset class. Because nothing underlies Bitcoin’s worth except demand for its scarce 21 million coins, cynics argue that the digital currency rises in value only because investors think it will – a nod to the generations of children who clapped their hands to keep Peter Pan’s sidekick Tinkerbell in existence.
“Stay away from it. It’s a mirage, basically,” said Warren Buffett, CEO of Berkshire Hathaway, a value investment company capitalized at $596 billion. For every traditional institutional investor there are digital entrepreneurs like Twitter CEO Jack Dorsey who maintains that “The world ultimately will have a single currency. I personally believe that it will be Bitcoin.” Eric Schmidt, Google’s executive chairman, agrees. “As people move into Bitcoin for payments and receipts,” he said, “they stop using U.S. dollars, euros and Chinese yuan, which in the long term devalues those currencies.”
The Bottom Line
Almost doubling in value since the beginning of the year, Bitcoin has soared past many of the more traditional investments – Berkshire Hathaway included. Still, most financial advisors would agree that digital currency strategies belong at the more speculative end of the risk and reward spectrum. Advisors are increasingly becoming prepared to answer your cryptocurrency questions though, according to a study by Bitwise Asset Management. To learn more about the role digital assets can play in your financial strategy speaking with a financial advisor is still one of the best places to start.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.